Canterbury Earthquakes

Operating Balance Impact

The operating deficit before gains and losses included a net cost of $9.1 billion in relation to the Canterbury earthquakes (table 7).

1. Classified as "unallocated" for Budget 2011.

Source: The Treasury

The impact on the OBEGAL consists of $13.6 billion of expenses offset by income (mostly insurance proceeds) of $4.5 billion.

These results do not represent the likely final cost to the Crown arising from the earthquakes, as a number of decisions affecting the cost have still to be made (eg, decisions regarding properties in the Orange zone) or, in the case of local infrastructure costs, have yet to be measured. The total cost is expected to emerge over the next few years as future expenses, such as the cost of the Orange zone, become known.

The major components of this result were:

• EQC insurance costs (net of reinsurance) ($7.5 billion)
• the purchase of residential properties in the Red Zone ($0.7 billion), and
• the AMI support package ($0.3 billion).

On 23 June 2011, the Government announced four zones of land damage in Christchurch and the Waimakariri district (Red, Orange, Green, and White) and its intention to purchase residential property in the Red Zone. The estimated cost of this offer (net of insurance proceeds) was $653 million. Offers made after 30 June 2011 to Orange or White Zone residents are not included in this estimate. Therefore any costs associated with these zones will be recorded in subsequent years.

The Government has agreed to provide back-up support to AMI Insurance in order to give policy holders certainty and to ensure an orderly rebuild of Christchurch. The total amount of the support arrangement was $500 million, of which $335 million represents the portion estimated to be non-recoverable in the event that the support is called on.

Note 30 in these financial statements provides a detailed explanation of the fiscal impact of the earthquakes.

Impact on the National Disaster Fund

The most significant expense recognised in the current financial year relates to the insurance of residential properties by the Earthquake Commission (EQC).

EQC has recorded total insurance expenses of $11.7 billion in the current financial year. Some of these expenses ($4.2 billion) will be met by reinsurers. The majority of the remaining costs are likely to be met by the National Disaster Fund which held around $6 billion prior to the September earthquake. Support will be provided by the Government in the event a shortfall arises in the Fund.

EQC's costs were significantly higher than the $3.1 billion (net of reinsurance) forecast in the May 2011 Budget. This increase reflects an increase in damage estimates for both the February and June earthquakes as building and land damage were estimated to be higher than originally thought.

Charges against the Canterbury Earthquake Recovery Fund

In the 2011 Budget the Government established the Canterbury Earthquake Recovery Fund (CERF) to provide for central government's cost of the earthquakes.

Source: The Treasury

A total of $5.5 billion costs were estimated over a six year period; $2.8 billion of this cost was expected in the current year. Actual costs recorded against the fund this year were $1.6 billion (refer table 8) and includes the estimated cost of purchasing residential property in the Red Zone and the non-recoverable portion of the AMI support package.

While costs recorded against CERF in the current financial year were $1.2 billion less than anticipated, this was primarily caused by delays in assessing and measuring damage. It is therefore likely that this variance will reverse in the next financial year as these assessments are made.

Debt Impact

While the operating deficit increased markedly as a result of the earthquakes, the impact on cash (and net core Crown debt) was much smaller with $1.7 billion paid out during the year. The majority of the cash related to claims payments by EQC ($1.2 billion) out of the National Disaster Fund rather than increasing net core Crown debt.

While a number of expenses are recorded which represent obligations of the Government at 30 June 2011, the cash payments associated with those obligations are made over a longer period of time. Therefore, the full impact on debt is expected to be recorded over a number of years as claims are settled or the rebuild takes place.

Future Costs

The cost of the Government's contribution to repairing essential local infrastructure (fresh water, storm water, waste water, and river management systems) requires judgements on the extent and cost of damage in the Canterbury region, on which information remains limited, and judgements on the approach to rebuilding Christchurch, on which decisions have yet to be made. As a result, costs associated with these repairs have not been included in these financial statements. Instead, a contingent liability has been included in the notes to the financial statements (note 32) describing the types and potential range of costs.

In addition, there are still a number of significant decisions to be made regarding the nature of the reconstruction and rebuild. These decisions will likely have fiscal costs associated with them and they include the need to make decisions on the future of the recently announced orange and white zones.

There will also be expenses which will be incurred in the future, such as demolition costs, as the rebuild of Canterbury continues. These costs will be recognised at the time they are incurred.

It is likely that costs will continue to be recognised over the next few years as these decisions are made and the costs are finalised.

Judgements and Estimations

All financial statements include an element of judgement and estimation. The estimation of claims and provisions arising from the Canterbury earthquakes are key areas of judgement in these financial statements.

Cost estimates have been based on the information available at the time of preparing these financial statements. The largest and most complex valuations have been carried out by independent professional actuaries and represent a best estimate of the costs to date. However the final costs of the Canterbury earthquakes will not be certain for some time and these estimates may differ from those final costs.